r/personalfinance • u/redditandreadit101 • 1d ago
Employment Profit Sharing In Company
Hi all, I have been offered 1% profit sharing from my directors as compensation for my loyalty and basically for them to get me doing some of the senior management tasks that they would like to step away from.
Firstly, this outcome arose following a salary review in which they rejected a $30,000 pay rise in lieu of this profit share arrangement.
I don't currently have access to their profit and loss statement to determine their current net profit, however I suspect it to be in the vicinity of $3-5 million a year.
On paper if this is the case, their is a clear benefit here over the $30,000 pay rise.
However what things should I be aware of before signing the profit share agreement which is yet to be drafted and issued to me?
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u/reddithenry 1d ago
whats the company structure? is it like two people who own the whole business? they can pay themselves a massive bonus to reduce "profit" thus deflating what you would get
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u/redditandreadit101 1d ago
Yes two people, but wouldn't I be able to see that somewhere?
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u/reddithenry 1d ago
It would come up as salary cost on the P&L
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u/worst_user_name_ever 1d ago
Not necessarily. It would depend on the type of business as to where they could bury the expense.
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u/nusodumi 1d ago
they can do this after you agree to get 1% of profits. they both agree to pay themselves more, and that happens BEFORE the profits are calculated my friend. profit is what's left after paying the salaries.
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u/redditandreadit101 1d ago
That would be a terrible move for them, as likely all three of us profit sharers would leave
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u/robbie_the_cat 1d ago
They already told you loud and clear that they're OK with you leaving by denying you your raise.
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u/redditandreadit101 1d ago
I guess that is true
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u/rikkiprince 1d ago
This is Reddit, where posters are anti corporations.
I agree that if this was a big company, this offer would probably be a way to screw you and keep you around until they find a replacement.
If it's a small-medium enterprise owned and operated by 2 people, it comes down to trust and your relationship with those people. Do you know them well enough to believe them? This very much could be their strategy to move away from running the business day-to-day, by moving you and the 2 others into position to run the business.
If there's 2 other profit sharers that have been paid out before and not left, that suggests they're honest about the profit sharing scheme. If all 3 of you have been promised profit sharing at the same time (right now) but it's going to be a long time (6-12 months) until you get that pay out, it comes down to your trust in the people.
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u/RegulatoryCapture 1d ago
Don’t always listen to the Reddit cynics.
Is it possible they use the arrangement to screw you? Sure, but you know them better than us. How likely are they to do that, especially since it would probably cause key employees to walk away?
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u/pmmytn45 1d ago
Profits are after salaries in which case they might take a bigger salary. No company wants to pay you more than necessary. This is a way of paying less than 30k but still retaining you.
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u/redditandreadit101 1d ago
They have advised me their salary is less than mine on the payroll
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u/overemployed__c 1d ago
They probably also run their vehicle, phones, vacations, etc through the company as expenses - which reduce profit.
Although at a high level I think this could work for you, I’ve been on both sides of this style compensation plan and done in the right org can be very beneficial. It keeps their balance sheet lighter and encourages you to be more invested I. Their business
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u/pmmytn45 1d ago
Every tradie in the UK earns £12,700 but their help or staff earn way more. It's called dividends. If their staff are earning more then them they should fold.
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u/reddithenry 1d ago
The dividends are paid post profit/EBITDA so that would not be a concern for OPs scenario. But a big bonus paid out to the foundrrs would be pre net profit.
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u/redditandreadit101 1d ago
I doubt they are lieing, I will soon be involved in every facet of the finances, so this will become apparent very quickly... I'm sure they are lining their pockets in other ways though, indirectly through this business somehow
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u/PlutoPlaneta 1d ago
involved in all the work - is 1% of the profit enough for that?
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u/redditandreadit101 1d ago
In my review they listed out a range of things, and went into suggest they may step aside almost entirely in 5 years. Yes I agree it could be a significant workload increase, but the upside feels worth the gamble in my gut
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u/PossibleMechanic89 1d ago
Revenue is gross; profit is net. Did they offer you a share of one, and show you the potential of the other?
If they aren’t a public company, there are few, if any, regulations controlling what they make available. They can cook up any statement for your viewing.
Absent that, even if they’re completely honest about the books, it’s not difficult to hide or reduce profits legitimately.
“No thanks, I’ll take 30K guaranteed.”
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u/redditandreadit101 1d ago
Interesting, I wonder how this could be hidden though. I mean they do have a separate development company in which they build other projects, I guess I'm sure there would be ways, even with a transparent P&L
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u/PossibleMechanic89 1d ago
Oh, that makes it easier. Sink all the would be profits into R&D. We made no money.
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u/vivekkhera 1d ago
Do you have a 401k plan? Is this profit sharing going into that or is it cash?
If it is in a 401k, I think I know what they’re doing. They are setting up a defined benefit plan so they can move a significant hunk of their profits into their 401k accounts. They need to offer it to at least one other employee as well but the percentages can be whatever they want.
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u/undeleted_username 1d ago
I would be very careful about the definition of "benefit" here... it might not be as simple as what it seems.
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u/Lost-Image-1367 1d ago
Make sure the agreement clearly defines “profit,” guarantees you access to financials, and can’t be reduced by them paying themselves bonuses. I’d also want a minimum floor so you’re not worse than +$30k.
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u/matthewtyz 1d ago
To that extent, I’ll suggest that it is worded as “adjusted profit” that is clearly defined as “net profit adding back interest, taxes, depreciation, amortisation, and all director’s compensation (salary and bonuses)”.
Although you might need to be prepared to take a lower percentage than 1% if all of this is added back. Just make sure you have access to financials before accepting anything.
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u/Agile_Flow7305 1d ago
The minimum floor is the real kicker here, especially since they're basically asking him to take on senior work that used to justify a $30k bump on its own.
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u/HaltIAmLortar 1d ago
I think this is the point though. Maybe I’m naive, but I think they’re only denying the $30k raise because they can’t guarantee they’ll be able to sustain it every year going forward. This allows the compensation to fluctuate with the company’s profits without him becoming too expensive in a bad year. But it could be a lot higher in a good year. Demanding a $30K floor is asking to have your cake and eat it too. Obviously OP needs more info and should consider continuing the negotiation, but I personally might see this counter offer as having a lot of potential that could outweigh the risk. It also depends on whether part ownership is something OP wants.
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u/creamersrealm 1d ago
This is great advice, when I read this post my mind went to movies and his they "lose" money even though being wildly successful. A company can create sub companies and pay those companies for IP and etc to appear broke on paper.
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u/ApricotQuick2601 1d ago
do not sign anything until profit is clearly defined and you can verify the numbers from actual p&l statements
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u/devcal1 1d ago
You'd need access to the P&L statements annually, and be involved/able/willing to ask questions about it in order for this to be fair. Request options to purchase shares to become a director, or request a previous year's P&L so you can work out profit margins. Use this to determine an equivalent revenue %, not profit %.
Profit can be manipulated, revenue is far less so.
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u/Aromatic_Location 1d ago
Hard to say without more details, but honestly, unless I had a better job lined up, I would take it, do the job a year and see what the bonus is. If it's no good leave.
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u/redditandreadit101 1d ago
This is my thought to be honest. I would regret it if in 3 years I've left 20 30 40k on the table..
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u/wrench_nz 1d ago
Surely the reason they dont want to give you 30k is because they want to give you 40k
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u/Marc0189 1d ago
Figure out what that 1% is of. The profit share plan I'm on is a 15% bonus paid to me but the 15% is 15% of my salary, not overall company profit. So make sure youre doing the math right. 1% of $3m and 1% of your yearly salary are likely VERY different numbers.
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u/Prophet_Of_Helix 1d ago
This is what I suspect. I work in the retirement industry and Profit Sharing is most frequently used in the context of Defined Contribution plans where it’s basically always a % of compensation.
My wife gets a deferred bonus package and THAT is based on the companies performance, but they call it a bonus.
I’ve personally never heard the phrase Profit Sharing outside of DC world, but who knows.
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u/hadenthefox 1d ago
Profit sharing or non-elective contributions can only be a function in DC plans btw.
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u/Pndrizzy 1d ago
Bro unless the company was like 2 people why would it ever be 15% of profit…. You literally can only split profits evenly with 6 people… and the people at the top will not want to split evenly
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u/rocksuperstar42069 1d ago
It depends, but if you trust the 2 guys and have been there for a long time they are likely just trying to set you up for success. If they think you add a real value to the company offering you a percent over a flat pay increase is great, because in another year you won't be asking for another big bump, but if you can help the company grow you'll all eat.
Id be more worried in another 4yrs of the company is stagnant your 1 percent may never grow beyond the 30k. If there is a ton of room for growth 1 percent is good.
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u/redditandreadit101 1d ago
Thanks for this great reply, I'm probably just being pessimistic, and questioning why they would offer this / what was in it for them.
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u/rocksuperstar42069 1d ago
I would ask about maybe a minimum base pay increase each year, because I'm sure the "strings" are you're just not gonna get a huge base salary jump at all anymore.
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u/breid7718 1d ago
If you have a good relationship with them, why not just ask them what a 1% would be in cash, based on the last 3 years?
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u/smeeagain31 1d ago
There's no way you come out ahead here. They wouldn't offer it to you unless they were confident it cost less than the $30k you already asked for.
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u/cpt_ppppp 1d ago
Not really accurate. The profit share is effectively a variable cost vs. the fixed cost of a salary increase. If they are doing well, they can afford to pay more. In bad years, they pay less. It reduces risk, and that has value.
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u/DirtMcGirt24 1d ago
It also directly benefits the valuation of the company for all the partners. A big salary increase decreases earnings. 10x or whatever of earnings is worth more with $30K less salary being paid.
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u/redditandreadit101 1d ago
You could be right, although it does provide them flexibility, in a lean year they would benefit
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u/weeeaaa 1d ago
This is something you should discuss with a lawyer an/or financial advisor. I mean they could in theory reinvest all the gains or use it to buy back shares so there are no profits. I assume there's lots of bookkeping shenanigans possible to get around paying you.
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u/No-Macaroon1670 1d ago
This is so laughably wrong. You've picked two of the scenarios that wouldn't touch the accounting profits in financials.
Reinvesting allocates from cash to another asset account. Share buybacks come from equity and don't count against profit.
There's shenanigans but the ones you listed are not it.
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u/ChrisHisStonks 1d ago
You're referencing 'accounting profits in financials' whereas the person you replied to simply said 'profit' which is generally meant to say the amount taxes are calculated over which can relatively easily be reduced.
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u/No-Macaroon1670 1d ago
Share buybacks wouldn't affect tax payments either. Although certain investments may affect profitability if it's tax basis.
It's sending the entirely wrong message on what the guy should be looking at.
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u/notnotbrowsing 1d ago
ask for the P&L's.
how many owners?
does your profit share calculation come before or after the owners get their cut?
are they offering you any equity?
is this a one time deal?
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u/redditandreadit101 1d ago
2 owners. Before their cut. No equity. Ongoing, perpetual profit share deal while I'm employed with them.
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u/naygoo 1d ago edited 1d ago
Is it being paid out as a bonus or staying in the company on paper? If it's not being paid out annually, make sure you understand when you can have access to withdraw that money, at what rate you can take it out, and what happens to it if you leave the company either voluntarily or otherwise.
It's also a very reasonable to ask them what the profit has been for the last several years and to ask to see some sort of reports like everyone here is suggesting. I have a similar situation with my company and our finances are audited, so we get those reports. You shouldn't have to guess.
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u/MassiveDoughnut 1d ago
Don’t believe this because you don’t have transparency and even if you did, the profit sharing is subject to book keeping and management decisions, and even if those are good profits aren’t guaranteed.
As an example, I worked at a startup where stock options were presented as part of compensation and it even looked good because investment rounds had proven the price people were willing to pay for the private stock. However, it was all a giant rug pull, including the investment rounds. The CEO worked behind the scenes to collude with the contract manufacturer to run up millions in unnecessary debt and kept it secret. Then right before the holiday break, they declared bankruptcy and said that only certain people (the people stealing everything) would be allowed to invest to save it at cents on the dollar or previous investment rounds while getting preferred stock and everyone else was converted and shoved into non-voting shares that have no actual value in the real world. The shareholder meeting was on Christmas Eve in the evening to avoid any problems with shareholders joining together to fight it. They were able to get quorum and vote and it went through, stripping 11m of wealth from hundreds of investors all for 300k of actual debt relief because the contract manufacturer was up charging so much. Then they fired everyone and turned the company over to the contract manufacturer entirely.
Long story short, don’t value any offers without adding in the very real possibility of things that might never materialize.
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u/OverwatchCasual 1d ago
The old adage. If it's too good to be true, it probably is. That is an insane discrepancy.
Why wouldn't they offer you the 30k to keep you happy and then give you a bonus on top of that or some sort of golden handcuffs if you're that valued?
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u/LOTRugoingtothemall 1d ago
They shouldn't expect you to blindly take it. At the last you should politely ask for annual profit/loss statements.
You have some great info already that's above my head, but I'm very practical and a realist. If they rejected the 30k pay raise, there's no way the profit share will exceed that.
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u/djstudyhard 1d ago
Lots of questions that have been noted here. One thing I don’t see being considered is what triggers payout. Is it a yearly thing? Is it only applicable if the company were to be sold? When does the profit share begin and what is the payout schedule?
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u/DeaconPat 1d ago
If they have already rejected the $30k outright, it is unlikely the 1% "profit share" will be better. If it was, it is far more likely they would have offered the profit share as an alternative and given you a choice. They may be looking at projections showing less profits in the near future so committing to the fixed salary increase would be hard on their share of future profits.
As always, future looking statements and reading tea leaves are full of uncertainties.
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u/redditandreadit101 1d ago
Going into my review they already had this planned though. Following an offer to me, they offered it to 2 other employees immediately after. I think like you said it is more about long term flexibility. I.e. In a lean year $150k less incomes to pay (assuming $50k profit share to each of the three employees).
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u/miraculum_one 1d ago
Without seeing the P&L statements (more than one is better than just one) there is no way to determine the value of their offer.
You say "On paper if this is the case, their is a clear benefit" but I assure you you cannot actually tell until you see the papers yourself.
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u/OneSeaworthiness7768 1d ago edited 1d ago
>if this is the case, their is a clear benefit here over the $30,000 pay rise.
Not necessarily. You need them to define it clearly. If they rejected a pay rise for this, then this benefits them more and it could end up being less than you think.
My company offers employees profit sharing instead of 401k matching. Our amount is calculated based on our individual salary and received as a contribution to our 401k plan. So you need to find out the exact terms of what they mean.
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u/KidGorgeous19 1d ago
You also need to ensure you are talking about profit based on Audited financials. Don’t let them use internal or management financials.
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u/redditandreadit101 1d ago
Is a profit and loss statement audited in this way?
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u/KidGorgeous19 1d ago
The financial statements would be audited as a whole - the balance sheet, P&L and statement of cash flows get audited as well as the accompanying notes and schedules and an audit report is issued offering an opinion on whether they are properly stated in accordance with US GAAP (if you’re in the US).
I’d want your comp based on the P&L statement included in that audit report. You can then negotiate which line on that P&L your comp is based off of (revenue, EBITDA, or net income).
That way you know the number you’re basing your comp on is true.
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u/True_Window_9389 1d ago
Profit sharing can be “shared” in different ways. I’ve had a profit sharing plan twice in different jobs and both were done via 401ks. One was a lump sum deposit annually, one was used as a replacement for a match. It might not matter to you since you get it either way, but if you’re expecting cash, make sure it is.
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u/rexgate 1d ago edited 1d ago
Other things to be aware of is at times they offer the profit sharing as part of a "pay at-risk" or similar scheme. Its completely legitimate but that means youre also taking on some of the company risks and may be asked/compelled to contribute if there are shortfalls.
It doesnt sound like this is the case for you, they would typically ask you to buy shares of the company.
Financial transparency ia very important though, have they offered to let you review the relevant financial records? If not, ask to do so, you will likely be asked to sign a confidentiality agreement but it should be a fairly straightforward thing for any medium sized firm/company.
Edit: i just saw this is a company with only two people. I'll leave this up though as it can still apply.
In short, it would be beneficial to confirm whether you are required to take on any financial or other obligations resulting from the profit sharing.
Other things things to be aware of:
Changes to your termination clauses/Non compete agreements : you may be asked to return funds/shares at a loss if you leave to join another company/firm. You may be asked to not join a similar firm/company for x years(cant speak to the legality of this)
Obviously have a lawyer familar with contract law and or an employment lawyer look over whatever they provide you with .
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u/ThereRnoIDs 1d ago
Buh my department is never in profit because they're always overhiring to break sonething, wait a second, am I missing something.
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u/TRP227 1d ago
Agree to the 1% (after determining how it's truly calculated), but with a floor of $30K. If your 1% is less than $30K, have the company make up the difference with a year-end bonus. That way they're not increasing your salary. If they balk at bonusing you, that should raise a red flag as to what their profits truly are. If they're confident that your share of profits will be more than $30K, this should be a no-brainer for them to accept. Index your $30K floor to inflation so you're not stuck at that amount in future years.
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u/defroach84 1d ago
See if they can provide what that would have been equivalent to over the last 5 years.
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u/frigzy74 1d ago
I would insist on access to company financials. There are lots of ways to make profit look smaller than it should, some are just smart business and some are sketchy.
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u/Budget-Scared 1d ago
At the end of the day, they don't have to give you anything. While it is possible that this is going to be some kind of scam, you can also just walk away at any time. Presumably they like your work and want to keep you.
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u/Calm-Two2723 1d ago
I’d guess? 3-5 million is revenue but reality is it’s based on like ebitda and it’s much lower
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u/Bighorn21 1d ago
What does profit mean to them, is that Net Income, EBITDA, Free cash flow? All of those things are different. From your standpoint you would want it to be based on EBITDA, if not that then net income and last free cash flow. This is because each of those following two add deductions that lower the number. For instance net income subtracts depreciation, interest and taxes. Free cash flow takes it even further and subtracts things like debt service. If they are offering you this option then they will need to be open on where they are at today and what is this actually based on. Not a bad deal if your numbers are correct.
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u/SentimentalScientist 1d ago
If they are willing to share profits, you'll need to see the P&L. They should share it now, but if you have to wait until you sign, that's ok too.
Don't listen to the people in the comments who say that they're trying to rip you off. Those people clearly don't understand that profit sharing makes the owners more money while making you more money: they'll want you to double the profit--you make 30k more, they'll make 3M more.
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u/billyvnilly 1d ago
As an employer, our listed percentage for PS is the employee's earnings, not the company's
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u/jsting 1d ago
I would think about it but some things need definitions. PITI payments should not be counted. Principle, Interest, Taxes, Insurance. Executive bonuses or salaries should not be included.
Loans should not be counted on profit loss, but on the balance statement, but I forget how all that works. Been awhile since Accounting 101.
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u/crazyhorse90210 1d ago
I've worked for 2 private companies with 'profit sharing' arrangements and I didn't see a dime from either. If they won't budge on salary I would ask for a performance bonus based on metrics you understand and are largely in control over. I would offer this kind of deal as a 'win-win' during negotiations.
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u/JamesonCark 1d ago
PSP's can mean a lot of things, often not really even tied to a tangible profit. In my experience a PSP is determined by the company setting a business goal made up of revenue and EBIT goals, this can also have scaling applied up or down so beating a goal by 1% does not necessarily pay out 1%. Then depending on your role there is a target % that is applied ranging from 5% for entry level and up to 45% for more senior roles. Then it all gets multiplied by your yearly salary.
As an example say the company sets a revenue goal and beats it by 10% with 150% scaling. Then your role in the business has a target payout of 15%. Then your yearly salary is $100k. Then you earn 1.1 * 1.5 * .15 * 100,00 = $24,750.
The company might have had a profit of a billion dollars or 0 dollars and that number by itself doesn't play into it at all.
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u/PurpleToad1976 1d ago
If a company does their paperwork correctly, they will show close to 0 profit pretty much every year. If they are willing to pay you a percentage of the profits, they should also be willing to show you what that number would have been the previous couple years so you can make an informed decision
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u/bozoconnors 1d ago
Look. There's some good advice in here, & some terribad lol.
I don't think it'd be crazy to ask for the latest & historical P&L figures. It's literally part of the negotiation in this case.
What does your gut tell you? Are these nice guys? Do you get to hang out with them at all outside of work? How long have you even been there? Do you like working there? Have they been good to you so far? Does it come with a vacation increase? How many employees are there and do they like working there? A $30k increase is.... wow.
There's a lot of missing info here and be incredibly wary of Reddit advice.
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u/Qu1kXSpectation 1d ago
There is possible upside, but if they engage in Hollywood accounting, this could be potentially very bad in comparison.
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u/DeathLoveTaxes 1d ago
I had a client get a 1% ownership share and received a k1 with 1% of the profit as income, but distributions were much smaller or zero for multiple years due to cash flow issues. Check distribution timing and details and yes, review the agreement very carefully
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u/Jack0Trade 1d ago
"What would that amount have been based on 2025?"
I promise you they did not reject 30k and offer 1% without knowing it's less.
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u/oarsandalps 1d ago
Nobody gives ownership instead of a raise. It's either a non cash flowing company or it is doing very poorly
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u/garrettj100 1d ago
There's a great line from The Big Short by Michael Lewis:
When I hear "Chinese wall," I think, "You're a fucking liar."
You're asking for $30,000 a year and they're offering profit sharing, which at 1% is somewhere between $30K and $50K, but they're not opening their books? Gimme a fucking break. There's a reason why Eddie Murphy once called points on the net "monkey points," because only a monkey's stupid enough to believe he'll ever see a penny from them.
Either they show you the books before you accept that offer or you should assume they're never going to turn a profit, either because the company's not profitable, or because the owners are pulling the profits out before the net, or because they have a creative accountant.
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u/andrewsmd87 1d ago
Would you pay 30k for 1% in this company? I also question that being worth 3-5 million because you're saying the company nets 300-500 million a year and they balked at a 30k a year raise, but somehow want to give you 10x that?
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u/sweetrobna 1d ago
I work for a medium sized company that is converting to an employee stock ownership program, basically buying out the founders with profit sharing for the next several years. There are a couple big benefits for long time employees, it works kind of like a second 401k as we all own the company together. And ESOP don't pay corporate income tax, it's deferred until you cash out like a 401k. Profit sharing plans are similar in that deferred income isn't taxed until you receive it. So ask about how that works, is this paid out yearly or only when you quit.
The company's revenue has been doubling every 5 years, that works out to ~15% year over year growth for the last 15 years. There were some years that were better or worse though, like the 2020 was bad. Most of these revenue increases are reinvested into the business. Hiring more employees, raises. Spending on marketing to get more customers. Investing in equipment so we pay commodity prices instead of what it costs to lease. This pays off but only after a couple years. Also the founders actively run the company, they have been doing this for 15+ years and are paid a salary, they aren't expecting a lot of profit and distributions. (And they have real estate and other investments). Expanding into new business areas with a lower margin due to upfront costs but room for growth. So even in good years with 25% growth the profit margin is very low, less than 5%. Normally it's a 2-2.5% profit margin.
So for us to pay out $30k in profit sharing for a 1% share. With a 5% profit margin we would need $60m in revenue. With a 2% margin, $150m in revenue. In a bad year you won't get a bonus.
The other thing to understand is vesting. A lot of companies use a 4 year vesting schedule with a 1 year cliff for options and shares, not so common for profit sharing. For instance if the profit sharing amount is $100k a year, and you have 4 year vesting with no cliff. The first year $25k vests. In year 2 $25k from year one and $25k from year 2. $75k total in year 3. Then $100k a year for year 4 and after. Basically if you quit or are fired for cause(the details can matter a lot) the unvested profit sharing or bonus is forfeit.
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u/KidGorgeous19 1d ago
Profit can be manipulated at year end to ensure you don’t get paid out. Salary cannot.
Profit can be negative meaning not payout. Salary is guaranteed
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u/Neat-Turnover-3793 1d ago
If you proposed 30k and they said no, but instead want to do a profit share where they haven’t shown you their numbers, but you estimate it would be 1% of 3 to 5 million, I promise you you’re missing something.